APAC Realty Ltd (SGX: CLN) is a real estate brokerage company that operates under the ERA brand name. It has the second highest number of real estate agents in Singapore. In 2016, it commanded a 37.5% market share of transaction value in the Singapore residential market. In the first half of 2018, the group delivered a strong performance as net profit attributable to owners spiked 8.7% on the back of an optimistic real estate market.
Recently, I also wrote an article on three reasons why I believe APAC Realty would make a good long-term investment. But every company and investment comes with its own set of risks and potential pitfalls. In this article, I will highlight three potential downside risks that could hamper APAC Realty’s future earnings growth.
Government intervention and policies
The Singapore government has shown that it is willing to step in to curb property prices appreciating out of control. The government has said that it wants prices to increase at a sensible rate, and in tandem with wage growth.
We have already seen the impact property cooling measures can have on property prices in Singapore. After the first property cooling measures were put in place, property prices spiralled downwards for 14 straight quarters.
With the most recent additional property cooling measure, one can only guess what the overall impact on demand and prices will be in the next few quarters. More interventions by the local government in the future can, therefore, have a very meaningful impact on APAC Realty’s revenue and profit growth in the future.
Short history as a listed company
APAC Realty only went public late last year, giving it a short history as public-listed company. This poses additional risk for shareholders as investors are unable to gauge management’s capabilities in capital allocation, expanding the business and keeping its business relevant in the dynamic business world. Therefore, it is preferable to monitor its business over a longer period of time before we can properly gauge the capability of its management and the long-term sustainability of its business.
It is also worth noting that APAC Realty’s chief executive, Chua Khee Hak’s total remuneration was between S$2.5 million and S$2.75 million. His compensation package represented at least 9.7% of APAC Realty’s net profit attributable to shareholders of S$25.9 million in the same year. This is comparatively high and is worth keeping an eye on.
Growing threat of competitors
Another concern for APAC Realty is the growing threat of PropNex Ltd (SGX: OYY), which is the largest real estate services company in Singapore. PropNex has 6,684 sales persons in Singapore (as of 1 Jan 2018), larger than the 5,882 sales persons under ERA.
The economies of scale allows PropNex to garner a larger share of the new property projects. The company currently has a 42.7% market share in residential primary private market and a 45.3% market share in residential HDB resale markets.
The Foolish bottom line
Despite reasons to be bullish about APAC Realty, investors should also know that there are some risks and potential pitfalls that could dampen the group’s earnings and subsequently, shareholder return. Investors should take all these into consideration and weigh out the risk-reward profile when making an investment decision.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Jeremy Chia doesn’t own shares in any companies mentioned.